Problem P16.13 Flashcards
Declared a cash dividend; Current Ratio.
Decrease.
The current ratio is obtained by dividing current assets by current liabilities. Declaring a cash dividend will increase current liabilities, but have no effect on current assets. Therefore, the current ratio will decrease.
Sold inventory on account at cost; Acid-Test Ratio.
Increase. The acid-test ratio is obtained by dividing quick assets by current liabilities. A sale of inventory on account will increase the quick assets (cash or accounts receivable) but have no effect on the current liabilities. for this reason, the acid-test ratio will increase. The same effect would result regardless of whether the inventory was sold at cost, at a profit, or at a loss. That is, the acid-test ratio would increase in all cases; the only differences would be the amount of the increase.
Issued bonds with an interest rate of 8%. The company’s return on assets is 10%; Return on Equity.
Increase. The return on equity is obtained by dividing net income by average stockholders’ equity. The interest rate on the bonds is only 8%. Since the company’s assets earn at a rate of return of 10%, positive leverage would come into effect, increase the return to the common stockholders.
Net income decreased by 10% between last year and this year. Long-term debt remained unchanged; Times Interest Earned
Decrease. The times interest earned ratio is obtained by dividing earnings before interest expense and income taxes by interest expense. A decrease in net income would mean less income available to cover interest payments. Therefore the times-interest-earned ratio would decrease.
Paid a previously declared cash dividend; Current Ratio.
Increase. The current ratio is obtained by dividing current assets by current liabilities. Payment of a previously declared cash dividend will reduce both current assets and current liabilities by the same amount. Assuming that current assets exceed the current liabilities before this transaction, an equal reduction to both current assets and current liabilities will result in an increase in the current ratio.
The market price of the company’s common stock dropped from $24.50 to $20.00. The dividend paid per share remained unchanged; Dividend Payout Ratio.
No Effect. The dividend payout ratio is obtained by dividing the dividends per share by the earnings per share. Therefore, changes in the market price of the company’s common stock have no effect on this ratio.
Obsolete inventory totaling $100,000 was written off as a loss; Inventory Turnover Ratio.
Increase. The inventory turnover ratio is obtained by dividing the cost of goods sold by average inventory. A write-off of inventory will reduce the inventory balance, thereby increasing the turnover in relation to a given level of sales.
Sold inventory for cash at a profit; Debt-To-Equity Ratio.
Decrease. The debt-to-equity ratio is obtained by dividing total liabilities by stockholders’ equity. Sale of inventory at a profit will increase net income, which increases retained earnings and stockholders’ equity. An increase in stockholders’ equity will decrease the debt-to-equity ratio.
Changed customer credit terms from 2/10, n/30 to 2/15, n/30 to comply with a change in industry practice; Accounts Receivable Turnover Ratio.
Decrease. The accounts receivable turnover is obtained by dividing sales on account by average accounts receivable. Extended credit terms for customers means that customers on the average will be taking longer to pay their bills. As a result, the accounts receivable will “turn over,” or be collected, less frequently during a given year.
Issued a stock dividend to common stockholders; Book Value per Share.
Decrease. Book value per share is obtained by dividing total stockholders’ equity by the number of common shares outstanding. A common stock dividend will result in a greater number of shares outstanding with no change in the underlying assets. The result will be a decrease in the book value per share.
The market price of the company’s common stock increased from $24.50 to $30.00; Book Value per Share.
No Effect. Book value per share is obtained by dividing total stockholders’ equity by the number of common shares outstanding. It is not affected by current market prices for the company’s stock.
Paid $40,000 on accounts payable; Working Capital.
No Effect. Working capital is obtained by subtracting current liabilities from current assets. Payments on account reduce cash and accounts payable by equal amounts; thus, the amount of working capital is not affected.
Issued a stock dividend to common stockholders; Earnings per Share.
Decrease. Earnings per share is obtained by dividing net income by the average number of common shares outstanding. The stock dividend will increase the number of common shares outstanding thereby decreasing the earnings per share.
Paid Accounts Payable; Debt-to-Equity Ratio
Decrease. The debt-to-equity ratio is obtained by diving total liabilities by stockholders’ equity. Payments to creditors will reduce the total liabilities of a company, thereby decreasing the debt-to-equity ratio.
Purchased inventory on account; Acid-Test Ratio
Decrease. The acid-test ratio is obtained by dividing quick assets by current liabilities. A purchase of inventory on account will increase current liabilities, but will not increase the quick assets. Therefore the ratio of quick assets to current liabilities will decrease.
